- We reaffirm our BUY conviction on Berjaya Food (BFood), with an unchanged fair value of RM2.30/share, based on our DCF valuation.

- BFood 1QFY14 earnings came in at RM5mil (+131% YoY, +5% QoQ). Although this constitutes only 17% of our FY14F full-year estimates of RM30mil, the result is deemed to be within expectations, given the slower-than-expected 1Q period. This is due to the Muslim fasting month which began on 10 July 2013.

- With the end of the fasting period, we expect earnings momentum to pick up in the coming months. Therefore, we are maintaining our FY14F-FY16F earnings estimates for now.

- The strong YoY earnings growth was mainly attributed to the consolidation of Starbucks Coffee and Jollibean Food Pte Ltd (JFPL), which caused earnings to more than double.

- Kenny Rogers Roaster (KRR) Malaysia remains as the key revenue generator (67% of total revenue), followed by JFPL with 26% and Indonesia at 10%.

- KRR Indonesia’s immediate-term earnings continue to remain under pressure. As operations approach a break-even point in FY15F with the scale up in store count, we expect the turnaround to have a more meaningful contribution to earnings then.

- Similar to Starbucks’ loyalty program, we understand that BFood is looking to implement a loyalty card programme for KRR Malaysia. We view this positively as it could draw the crowd to dine at KRR more frequently should the programme materialises.

- All in all, fundamentals of the group remain attractive. Going forward, the pipeline of new store (KRR Malaysia: +9, KRR Indonesia: +8, Starbucks: +10 and JFPL: +5) and its strong franchise value will continue to underpin the group’s 3-year earnings CAGR of 32%.

- At the current level, the stock is trading at 19x FY14F fully-diluted PE, within its historical range of 11x-21x.

Source: AmeSecurities